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Pollution Exclusions and a Possible Claim (US)

06 April 2022 Donald Dinnie, Norton Rose Fulbright
Donald Dinnie, Norton Rose Fulbright

Donald Dinnie, Norton Rose Fulbright

In this judgment Colonial Pipeline Company v AIG Specialty Insurance Company, 1:19 –cv-762-MLB in the US District Court Georgia the insured had discovered a gasoline leak in its petroleum system which caused the insured substantial damages.  The insurer declined to indemnify the insured for those damages.

One of the disputes was whether the policy covered a settlement amount the insured paid to the relevant State department of environmental management to resolve a lawsuit launched by that department arising out of the gasoline leak. The parties agreed that the settlement could only be covered if the relevant lawsuit constituted a “Possible Claim” under the policy.

The leak was discovered in September 2016 and the insured was only sued over the leak in March 2018 well after the insurance policy had expired.

The lawsuit was not a “Covered Claim” under the policy because it was not made and reported “during the Policy Period”.

The Policy also covered “Possible Claims” to the extent that the possible claim was reported during the Policy Period and later ripened into an actual claim.

A Possible Claim included “… a Pollution Condition that first commenced on or after the Inception Date that the Insured reasonably expects may result in a Claim”.

That the relevant lawsuit possibly fell into that definition was not dispositive because the policy contained a carved-out exception to the “Possible Claim” definition.

The exception read:  “Possible Claim shall not include a Pollution Condition that results in a Claim during the Policy Period.”

The court held that the lawsuit fell squarely within the exception.

The leak constituted a “Pollution Condition” because it involved “[the] discharge, dispersal, release or escape” of a “liquid, gaseous or thermal irritant or contaminant”.   The lawsuit included “allegations about that Pollution Condition” and resulted in a Notice of Federal Interest from the United States Environmental Protection Agency sent during the policy period.  All parties agreed that the Notice constituted a “Claim”.

The lawsuit was therefore not a Possible Claim and was not covered.

First published by: Financial Institutions Legal Snapshot

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